US Treasurys took a break from rallying on Thursday morning following a raft of upbeat economic data which painted a picture of a healthy consumer and a rebounding manufacturing sector.
Fast forward a few hours and yields were back to doing what they’ve done best in 2019 – falling precipitously.
US equities managed to eke out a gain on the day, but benchmark yields in the US extended declines on Thursday afternoon, diving to 1.473%, a new low for 2019. When 1.50% broke, futures volumes surged, with nearly 10k going off in just a 1-minute window.
We are now at the lowest since August of 2016.
“10-year Treasury yield touched 1.50% on the dot”, Bloomberg’s Katherine Greifeld wrote, marking the occasion with a tweet. “Aaaand it’s gone. Should’ve waited 30 seconds!!”, she exclaimed, seconds later.
(BBG)
Appetite for duration has been insatiable of late, and according to BofA’s latest rates and FX sentiment survey, 10-year USTs are the hedge of choice by a wide margin, over gold, SPX puts, and the yen. In this month’s survey, 47% of respondents chose USTs, versus 34% in July.
(BofA)
As the bank’s Stefano Pascale wrote in a Tuesday note, “investors have not been so worried about the future in the past thirty years”.
That assessment is based on the number of 1-standard deviation moves in any 9-month rolling period for a basket comprised of Treasurys, gold and the yen.
(BofA)
The “everything rally” is rapidly metamorphosing into one of the most spectacular safe-haven bids in recent memory.
I ran across this snip (below) today and it helps make sense out of low rates, hedging and the state of global economic insanity. One theme lately has been that the low yields don’t matter as a recession barometer, because this time is different — maybe it’s different because the equity market is valued around $30 Trillion and the debt market is over $100 Trillion, while the total notional amounts outstanding for contracts in the derivatives market is an estimated $542.4 trillion!
Trading Sardines: The Case Of Currency Hedged Negative Yielding Bonds
The market did crash, and he opened the can to find that the sardines were rotten. He promptly went to the trader who had sold him the bad sardines and said “these sardines are no good!”, to which the second trader responded “of course they are no good for eating – they are trading sardines”!
When a bond has negative yield, like a majority of the bond market in Germany and Japan today does, the bonds are being bought for trading, not for holding as investments, unless we undertake some financial alchemy to figuratively turn garbage to gold (and vice versa).
One scenario in which currency volatility can rise sharply is a hiccup in risk assets that results in a rush into US fixed income assets for protection or due to an aggressive rate cut by the Fed, which would result in the narrowing of the interest rate differential between US rates and foreign rates (assuming that negative European rates don’t become more negative at the same speed) and a consequent fall in the forward exchange rate. This scenario would create a much lower yield pick-up when the currency hedges are rolled forward, resulting in possibly less demand for foreign bonds at their already low yields. The other scenario, which seems to be almost non-existent in the collective consciousness, is that European short term rates can rise a fair bit if there is a change in the ECBs philosophy towards quantitative easing and negative rates (note that Draghi is likely leaving in October), which would also possibly result in a collapse in the forward exchange rate and hence the yield pickup from hedging. Not a high probability forecast, but certainly a tail risk.
https://www.forbes.com/sites/vineerbhansali/2019/06/17/trading-sardines-the-case-of-currency-hedged-negative-yielding-bonds/